“The risk of further disruption of the Chinese economy means the stagflation impulse for the U.S., EU economies is greater, and therefore means the Fed, ECB etc. stay on aggressive tightening paths -- perhaps even more aggressive, following the lockdown -- but that they do this into an even softer growth environment,” said Peter Chatwell, a strategist at Mizuho International Plc. “This is extremely challenging for equity valuations.”
On the inflation front, there was some relief from commodity prices, with oil prices declining on concern that China’s Covid outbreak will dent consumption there.
But signs of caution, even fear, are widespread across asset classes. Measures of European credit risk rose on Monday to their highest since early March. Many investors have already started paring their exposure to junk bonds, seeking refuge in better-rated notes due to concerns over the weakest companies’ ability to weather a downturn.
Even Emmanuel Macron’s election victory in Sunday’s French presidential election failed to provide a boost to stocks at the start of the week, despite predictions that his defeat of Marine Le Pen would provide relief to investors. France’s benchmark CAC 40 fell 2.3%, and the euro also weakened amid dollar demand.
“In a risk-off environment, bad news gets priced very badly and good news is ignored,” Virginie Maisonneuve, global chief investment officer for equities at Allianz Global Investors, told Bloomberg Television. “It’s like, check on the list and move on.”
--With assistance from Neil Chatterjee.
This article was provided by Bloomberg News.